Indonesiaa��s commodities boom could power infrastructure development

Indonesia, with its rich reserves of natural commodities, could leverage its resources to address the poor and underdeveloped state of infrastructure, global investment strategist Julius Baer says.

In a recent interview with The Jakarta Post, Julius Baer Singapore head of investment solutions group Lee Boon Keng illustrated how Indonesia, a commodity exporter to China, could benefit from China, the worlda��s second-largest economy, through the lattera��s specialty of building infrastructure by exchanging commodities for infrastructure investment.

Here are excerpts of the interview:

Question: The US Federal Reserve has just completed its second round of quantitative easing and China is also planning to tighten its economy, aiming for a slowdown. This will end trillions of dollars of excess liquidity in the global market. How would that affect markets?

Answer: Commodities have been feeding on low interest rate and excess liquidity. Low interest rate and liquidity are really fueling the fire and right now I think whata��s going to happen is that when that ends, when the source, the fuel gets turned off, commodity [prices] will start to decline.

When that happens, youa��re going to have everything sold off: gold, silver, metal. Everything will get sold because most of the prices, there is one big slap that is due to the liquidity. For people who are still wondering how big that slap can be, it could be 30 percent within two weeks, because thata��s what happened to silver.

Remember silver came down from US$50 all the way to $30 within two weeks. Thata��s how big that speculation can be. You could see a 30 percent drop in the gold price, you could see a 30 percent drop in a lot of commodities. Ita��s scary and the market is not ready for it.

With Indonesia being one of the worlda��s key commodity exporters, how do you see that outlook affecting the country?

It will have a negative impact but I dona��t think ita��s going to create a crisis. While the whole commodity complex is going to get hurt, the commodity countries that are least affected will be Indonesia, because Indonesia is the least exposed among commodity countries. Brazil is high, Australia is high.

My suspicion is that we will see some unwinding across the world, including Southeast Asia. This will be the time when investors should seriously consider rebuilding their portfolio on Indonesia and on countries that are major exporters to China. Thata��s when the Chinese will then come and build roads, buying commodities in exchange.

Indonesia is going to face exactly the same problems as any commodity-driven economy, with the exception that it is in a unique position of needing what China can offer. And for the Chinese ita��s very simple a�� you dona��t need to pay in cash, you can pay with palm oil, coal or other commodities because they need it. The Chinese are very simple and you have what they want. Indonesia has a lot of resources and, as we all know, needs a lot of infrastructure, which the Chinese are very good at developing.

Is the Indonesian governmenta��s land acquisition bill going to be the panacea?

Perhaps not. Perhaps the government at some point is saying, look, Ia��m going to privatize infrastructure development, like what India is trying to do. The land acquisition act is really not going to work. India also has a land acquisition act, and when the land is acquired locals say they dona��t want to sell the land. Then politicians and the opposition create a large ruckus. So even with the act, nothing is going to be done.

What India will do is that if the process of infrastructure building is privatized, then private firms will do some very simple math. Is it profitable for me to build this road after I pay off everybody? If I pay you off, and you are happy, I acquire and build the road. No politics, just pure financial negotiations. Whatever toll is collected goes to the investor. So the investor just has to run a simple collection business. But will the toll he collects be more overtime than the price he paid for the land?

Investors, including the Chinese, are looking for the lowest risk possible. How has the role of political stability in Indonesia being touted by the government?

Of all Southeast Asian countries, excluding Singapore, the most stable in terms of politics is Indonesia, the least stable is Thailand, second is perhaps Malaysia. Indonesia now presents itself as politically stable, which actually is a very important platform for government-to-government negotiations.

So the Chinese government can come here and start massive government-to-government projects, whereas they would be very wary of conducting government-to-government deals with Bangkok because, guess what, two weeks later the whole government could change and everything they negotiated means nothing anymore. So that is one advantage Indonesia holds and must maintain.

The recent drop in approval ratings for President Susilo Bambang Yudhoyono has to be addressed to ensure Indonesia can create a sense of stability. Political stability is really one of the trump cards that Indonesia has right now, and it must try to do its best to maintain it.